Democratic News

S.3711, the Gulf of Mexico Energy Security Act of 2006
Key Concerns
 
Analysis by the Democratic Staff of the Senate Energy and Natural Resources Committee
 
 
An Overall Negative Impact on National Energy Security
 
Natural Gas Production Claims by Proponents Are Overblown.  Bill proponents claim that the bill will result in the new production of 5.83 trillion cubic feet of natural gas.  This claim is a misrepresentation.  Over half the natural gas represented by the 5.83 trillion cubic feet figure would be produced in the 181 area even if S.3711 was not passed (and the revenue to the government from this natural gas production is already assumed in the CBO budget baseline).  The real amount of natural gas made available specifically because of the bill is 2.76 trillion cubic feet, less than half of the claim.
 
More Natural Gas Is Being Put Under Moratorium Than Is Being Made Available.
o       S.3711 extends in statute until 2022 the existing year-to-year moratorium in the Gulf of Mexico.  That moratorium extension puts over 20 trillion cubic feet of natural gas out of reach for 16 more years, over a period (2006-2022) during which U.S. demand for natural gas will be increasing by more than 21 percent.
o       In addition to extending the current moratorium, S.3711 expands it.  S.3711 puts under moratorium, for the first time, three resource-rich areas of the original Lease Sale 181 Area.  Those 3 areas contain 2.96 trillion cubic feet of natural gas.  That natural gas, which would no longer be available for leasing, is also more than the natural gas that might actually be made available by the bill.
o       By taking about 10 times as much natural gas off the table as it makes available, S.3711 will make America more dependent on imported natural gas and will do little to ease future natural gas prices for industry and consumers.
 
Production Shifts Away from Smaller Independents to the Big Oil Companies.  Compared to the areas that would have been opened in the original 181 bill reported by the Energy Committee (S.2253), the areas being opened in S.3711 are more remote and deep (much of it more than 3000 meters below sea surface).  Only Big Oil will be bidding for much of the new area being opened, since the technology and capital required for operating that deep and that far from shore will be out of the reach of their smaller competitors. 
 
 
Claims that the Land and Water Conservation Fund (LWCF) Will Receive
Significant Funding from the Bill in the Near Term Are Not True
 
Bill proponents have touted the fact that the bill dedicates 12.5 percent of revenues to the State side of the Land and Water Conservation Fund.  Because in the first 10 years there is so little new energy produced by the bill, these funds are a trickle, as shown in the following table, based on the CBO cost estimate on S.3711.  To put these numbers in context, under S.3711 over the next 5 years, a cumulative total of $50 million would be made available for the State side of the LWCF.  By contrast, over the last 5 years, an average single-year total of $88.7 million has been made available to the State side of the LWCF in the normal appropriations process.  Thus, the amounts in the following table are much less than the amounts that would likely occur through normal appropriations.
 
Funding Stream in S.3711 for State Grants Under the
Land and Water Conservation Fund, 2007-2016
 
Millions of Dollars, by Fiscal Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0
0
27.5
7.5
15
12.5
8.75
15
23.75
36.25
 
 
Big Revenue Shifts to the Gulf Coast States Come After 2016
 
A New Entitlement is Created for the Gulf Coast States
o       Starting in 2017, S.3711 provides an entitlement to the four Gulf Coast States (Texas, Louisiana, Mississippi, and Alabama) equal to 37.5 percent of the income from new leases in the Central and Western Gulf of Mexico outside the 181 areas (termed in the bill as the “2002-2007 planning area”).
o       By 2017, this income is a very substantial number.  According to a Committee staff analysis using conservative data from the Minerals Management Service (MMS) of the Department of the Interior, this 37.5 percent fraction of lease income would amount to nearly $590 million in 2017, and would grow rapidly after that.  By 2022, the entitlement would conservatively amount to $1.2 billion per year.  Over the next 60 years, this entitlement to the Gulf Coast States would have a total value of at least $170 billion.
o       All of these revenues are from leases that will occur anyway, without enactment of S.3711.  This new entitlement is reaching into funds that will be in the CBO Budget Baseline after 2017.  These funds would normally be available for the appropriations process to serve the needs of all 50 States.  S.3711 spends these funds up to (but not over) the limit that would trigger a Budget Act point of order in the Senate, with the bulk of the funds going to the 4 Gulf Coast States.
 
There is a “$500 Million Cap” To Avoid a Budget Act Point of Order, But What If It Disappears?
o       The entitlement is subject to a “$500 million cap” in the bill that applies from 2016-2055.  This “cap” reduces spending to just below the amount that would trigger the “long-term” Budget Act point of order in the Senate.  Even with this reduction, it still leaves a large amount of revenue to be transferred to the Gulf States – an amount estimated to be somewhere between $28.5 billion and $30.5 billion.
o       Because the first 16 pages of S.3711 are devoted to setting up the formula and the conditions for this legal entitlement, and because it is only in the last 24 lines of S.3711 that a “cap” is placed on this amount of revenue diversion, Senators should focus on the above fiscal consequences (i.e., at least $170 billion of revenue diversion to the Gulf Coast States) if the “cap” were removed in the future and the provisions of the first 16 pages of S.3711 were to operate unimpeded.
 
The “$500 Million Cap” Also Contains a Surprising Add-On that Benefits the Gulf Coast States
o       The “cap” on spending in S.3711 has some novel features.  It starts off by stating that not more than $500 million of OCS revenues can be made available under the bill in a given fiscal year from 2016 to 2055.  As can be seen from MMS data, more than $500 million of OCS revenues from the Central and Western Gulf of Mexico will indeed be available for each of these years, so this means that there is guaranteed to be $500 million spent in each year.
o       The “cap” language then makes the $500 million figure “net of receipts from that fiscal year from any area” in the new areas opened by the bill.  The mathematical effect of this “net of receipts” provision is to add to the $500 million an extra amount of money equal to the entire amount of revenue from the new areas opened by S.3711.  In other words, this language is equivalent to diverting all of the revenue from the new areas opened under the bill into new spending under the bill, even though, technically, these receipts are to be shared 50:50 with the U.S. Treasury.
o       While CBO has not published what the total spending under the bill would be after 2016, if one simply used the CBO revenue estimate for S.3711 from 2016, there would be $880 million of spending under the “$500 million cap” in 2018 alone.  The Gulf Coast States would get a total of $660 million of this amount.  Since the CBO revenue estimates are growing at a healthy pace leading up to 2016, the real spending number for 2018 and every year beyond that (into perpetuity) is probably significantly higher than $880 million.
 
 
Unequal Treatment of States
 
A Moratorium Unique to Florida is Created – Why There and Not Elsewhere?
o       S.3711 establishes a 125-mile moratorium in Federal waters off the western coast of Florida, until the year 2022.  Added to this moratorium is a moratorium east of the so-called “Military Mission Line, which lies 234 miles off the western coat of Florida at Tampa.  These unprecedented restrictions on the use of Federal waters off one State raise the issue, “Why Florida and not other coastal States?”
 
OCS Revenues Belong Equally to All 50 States – But Are Diverted to Just 4 States
o       Supreme Court decisions and Federal law confirm that the Outer Continental Shelf belongs to all 50 States as a matter of national sovereignty of the United States. 
o       Up until now, coastal States have received only small amounts of funding from OCS revenues, as compensation for potential drainage by lessees in Federal waters of the oil and gas assets in nearby State waters.  These amounts of revenue have historically been equivalent to about 1 percent of all Federal revenues on the Outer Continental Shelf.
o       Under S.3711, just 4 coastal States will receive a 37.5 percent share of revenues from oil and gas assets owned by all 50 States, in perpetuity.  Even if subject to the “caps” discussed above, there would appear to be no policy justification for such a royalty diversion.
 
 
Lack of Recognition of Broader Energy Concerns
and No Mechanism for Addressing Them
 
S.3711 has a very narrow focus, and is likely to be the last energy vehicle considered by the Senate in this Congress.  Senate Republican Leadership has been unwilling to advance other energy legislation that has been introduced over the last year and which has been languishing (e.g., price gouging legislation, alternative fuels and vehicles legislation, energy efficiency legislation).  There is an expectation and a concern that amendments addressing these broader issues, which are strongly supported by the public, will be restricted, if not entirely blocked through parliamentary stratagems, on this bill.
 
 
A Likely Ticket to a Highly Problematic Conference
 
The House of Representatives Has Passed a Highly Problematic Bill That Will Be Paired with S.3711 in Any Conference
o       The House bill, H.R.4761, has revenue diversion provisions that dwarf the Senate provisions, affecting all $1.227 trillion of Federal revenues expected from the Outer Continental Shelf over the next 60 years and resulting in the diversion of hundreds of billions of dollars to Gulf Coast States, according to the Bush Administration.
o       H.R.4761 also broadly undermines environmental protection and mitigation with respect to both offshore and onshore energy and mineral production.  As one example, the bill appears to allow drilling in Marine Sanctuaries and coastal National Parks.
o       H.R.4761 also contains a controversial provision that provides that oil and gas activities will trump all other OCS uses, including shipping.  Under this provision, a drilling rig could be located in the center of a shipping channel, and the Coast Guard would not have an independent ability to prevent or mitigate the hazard to navigation.
 
House Republican Leadership Indicates that They Will Not Simply Send the Senate Bill, If Passed, to the President
o       Recent public statements by key House Republican leaders and their staffs discount the notion that the House of Representatives would pass the Senate bill in lieu of asking for a conference.